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Gertner v CFL Finance Limited – no provision of credit

On 22 May, Mr Justice Marcus Smith handed down judgment in Gertner v CFL Finance Limited [2020] EWHC 1241 (Ch), concerning inter alia whether the settlement between the parties, contained in a schedule to a Tomlin Order was a regulated credit agreement under the Consumer Credit Act 1974 (“CCA”). His decision, that the settlement agreement was not a credit agreement, and therefore not a regulated credit agreement under the CCA has important implications for all litigants.

Gertner was represented by Jonathan Kirk QC and Fred Philpott, and CFL Finance Ltd (“CFL”) was represented by Kate Urell, all of Gough Square Chambers.

Background

 In 2008 CFL lent money to a company wholly owned by the Gertner family, in relation to which Mr Gertner provided a personal guarantee. Proceedings were issued against Mr Gertner under the guarantee. Those proceedings were settled by way of a Tomlin Order dated 26 September 2011 (the “Tomlin Order”). The schedule to the Tomlin Order provided for settlement of Mr Gertner’s liability under the guarantee by periodic payments due on specified dates between December 2011 and September 2013. It also provided for various sums to become due and owing with interest in the event of his failure to make the periodic payments

Mr Gertner made some, but not all, of the payments required by the schedule, thereby triggering the default provisions. Accordingly, on 6 October 2015 CFL presented a petition for Mr Gertner’s bankruptcy, in response to which Mr Gertner agreed an IVA with his creditors.

However, on 15 January 2016 CFL applied to the court to revoke or suspend the approval of the IVA. CFL was ultimately successful in that attempt before the Court of Appeal in February 2019. On 4 March 2019 it therefore applied to restore the bankruptcy petition. When another of Mr Gertner’s creditors sought to convene a meeting of creditors for the purpose of agreeing a second IVA, CFL made an urgent application seeking the postponement of the creditors’ meeting over the hearing of its petition.

The matter was listed before Chief Insolvency and Companies Court Judge Briggs in June 2019. At that hearing Mr Gertner raised a preliminary challenge to CFL’s debt on two key grounds:

  • The debt arising out of the settlement agreement embodied in the schedule to the Tomlin Order contravened the CCA and was therefore unenforceable (the “CCA Argument”)
  • Alternatively, the default provisions amounted to a penalties at common law, rendering the debt unenforceable (the “Penalties Argument”).

Judge Briggs rejected both arguments ([2019] EWHC 1839 (Ch)). Gertner appealed.

Decision on appeal  

 The CCA and Penalties Arguments (amongst others) were repeated on appeal.

Mr Justice Marcus Smith considered the CCA Argument beginning at [55]. Upholding the decision of Judge Briggs that the settlement agreement was not regulated by the CCA as it did not provide credit, Mr Justice Marcus Smith held at [61(5)]:

“[…] the effect of the Settlement Agreement was to dispose of CFL’s claims against Mr Gertner under the guarantee and to replace them with a new (primary) obligation to pay the various sums set out in paragraph 7(3) above. There is nothing in the Settlement Agreement that involves the provision of any kind of credit or financial accommodation. All that has happened is that the parties have agreed to end the dispute between them on Mr Gertner’s promise to pay money to CFL. In no sense has the obligation to pay under the guarantee (to the extent that it existed) been deferred. Rather, that obligation has been extinguished, and replaced by another.”

Considering the policy reasons for disapplying the CCA, which had been referred to by Judge Briggs below, Mr Justice Marcus Smith noted in an obiter passage at [63]:

“I do not consider that this tenderness towards settlements could or should prevent the Consumer Credit Act from applying if according to the terms of the Act, properly construed, it did so apply […] It seems to me that if the Consumer Credit Act were to apply to a settlement, then even an express term in that settlement would not be able to exclude the Act, still less a desire on the part of the court to ensure settlements were upheld.”

Mr Justice Marcus Smith continued his obiter comments at [65] by stating that he could “see no reason why the fact that a contractual agreement is scheduled to a Tomlin order would cause the Consumer Credit Act to cease to apply if it otherwise did apply.”

Considering that he should be slow to interfere with the judgment of Judge Briggs, the Judge likewise dismissed the Penalties Argument on the facts before him at [74]. He further noted that even if Gertner had been successful on the Penalties Argument, he would have continued to owe a debt well above the bankruptcy threshold.

Discussion

Mr Justice Marcus Smith’s observations on the application of the CCA are of huge significance for any party seeking to settle a claim by way of payments timetabled in a Tomlin Order schedule. Parties to a settlement agreement, with wording similar to the Gertner/CFL settlement agreement, are unlikely to be entering into a credit agreement and therefore need not be concerned by the CCA.

However, in light of Mr Justice Marcus Smith’s obiter comment that settlement agreements do not automatically fall outside of the CCA, careful consideration must be given in each case to whether a proposed settlement agreement provides credit, and secondly, is regulated. It is not sufficient to assume that such agreements fall outside of the CCA.

Therefore, how best to avoid falling foul of the CCA when settling proceedings will now be an important consideration for all litigants. In particular, by inadvertently providing “financial accommodation” under section 9 CCA. The consequences of doing so without proper regulatory permissions include unenforceability of the settlement agreement, as well as potential criminal liability under section 23(1) of the Financial Services and Markets Act 2000.

Members of Chambers are available to advise on these issues, as well as the wider implications of this important decision.